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Economy in Brief

Euro Area PPI Is Up As Oil Prices Continue to Gain; Oil and the Coronavirus Are Important Factors in Setting This Trend
by Robert Brusca  February 4, 2020

The gain in the PPI in December on rising oil prices will find oil much lower in January as the coronavirus struck globally and as Brent and WTI prices have fallen. As a result, the trend in this report are likely to be blunted in the coming months so let's not be drawn into a discussion about how inflation is rising. This gain is probably a one-month illusion. With Brent prices today below $55/barrel, Brent is near its spike low point from December 2018. However, the average price of Brent for January 2020 will be nearly 3% lower than December's level. And in early-February, Brent prices already are 8% lower than the average January level. The Gulf oil states are trying to take special action to prop up oil prices even their own economies are showing signs of wear and tear from what have been oil prices lower than they had planned for. On balance, oil may push the inflation rate up for a while, but for now it does not look like oil will be an inflation factor in the first half of 2020. The global economy is slowing, so is the demand for energy, and the coronavirus is largely responsible.

The small table of correlations shows that Brent has large positive correlations with manufacturing prices in the PPI and with the HICP. It has a small impact on capital goods prices in the PPI – on consumer prices it has double that impact and nearly triple that impact on intermediate goods prices in the PPI.

On balance, when oil prices rise, we expect to see oil prices raising intermediate goods inflation the most followed by consumer goods and lastly followed by capital goods.

This month that progression is not in that order as consumer goods lead the inflation parade; they also are accelerating strongly. Capital goods are next, but they show a mild and weakening inflation rate gradient. Intermediate goods inflation is falling and decelerating. And this is despite oil prices being up double digits y/y after falling y/y one year ago and it's with three-month Brent gains in double digits themselves rising at a 20.1% pace.

It seems that the lagged effects from gyrating oil prices are impacting the PPI. Oil prices rose throughout December then began to erode and then to plunge in January. The oil price was so high in early-January (except for a spike in September); it was the highest price since May 2019 when oil prices made a sharp move lower. However, the peaking of prices in January was short-lived and while prices fell sharply and steadily in January, the big change in average oil prices will come (probably) in comparing February to January. In early-February, Brent oil prices are some 8% below their January average. So that is the story of oil for now.

Country trends in the PPI
Beyond oil, the table shows results for 11 EMU member and 14 European nations overall. In December, inflation is falling in four of eleven EMU members and in five of fourteen European nations. Over three months inflation is falling in five of fourteen European nations, the same as over six months. Over 12 months inflation falls in six of fourteen. There remains a core of disinflation in Europe; year-on-year inflation is falling by 0.7% in the EMU after it rose by 3% one year ago and Brent oil prices are up by 13.4% over the past year after falling by 10.4% over 12 months one year ago. With overall PPI falling over 12 months and Brent prices rising over 12 months, there is evidence of some lag at work and there is also some peculiarly volatile and uneven movements in oil prices.

Inflation factors
The only inflation metric 'building a head of steam' is consumer prices and that seems unlikely to continue given the weakness in oil prices. Then there is the impact of Brexit on European growth to consider as well as the impact of the coronavirus.

The coronavirus exposes the China card
China continues to show its self-serving colors even in the midst of an epidemic. China will do things its own way and refuse to be a part of the world economy and refuse to share broader global values. This is not the first time it has acted that way. Donald Trump's aggressive action on trade has exposed China's anti-competitive trade practices and has emboldened other nations to join the fight for freer trade with China. China did grab the South China Sea and refused to release its grip even when the World Court said “no.” Instead China has militarized the South China Sea islands it said it would not militarize. And now with the coronavirus, we see that China suppressed information about it as it started. China threatened doctors with jail for spreading lies (...substitute the word 'truth' here for 'lies'). It let the virus spread while trying to 'cover it up.' Taiwan has called China 'vile' for limiting access of WHO during the outbreak (here). And now while China is letting U.S. health officials in to help with the crisis, the Chinese aviation agency has ordered its national airlines to keep flying when foreign carriers are stopping flights to China (here). China is once again showing that it is a danger to the global economy. It will not play fair and will not act to protect public safety if it thinks (…even if it wrongly thinks) its own interests may lie elsewhere. Quite apart from worry about if China will live up to purchase promises in the U.S. Phase-One trade deal, or if China's economy will slow and impact the global economy, the rest of the world needs to think seriously about what it can do to force China to become a better more reliable global citizen. This will become even more important as world leaders look to deal with global climate change.

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